episode: 4

Investment Pitfall #2: Building Portfolios Based on Predictions

June 11, 2020

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About This Episode

As the great economist, John Kenneth Galbraith said, “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.”

It’s human nature to be drawn to stories. We all want someone to tell us how things will turn out and throughout history, people have used predictions to gain power. We see the same cycles play out in financial media and services.

From journalist predictions aimed at boosting readership and viewership to expert predictions coloured by the ingrained biases that we all have, we’re passionate about the fact that financial predictions should not be used in the management of portfolios. Predictions can easily sabotage your financial portfolio and jeopardize your long-term financial security.

On this episode, Keith and Marcelo talk about the two main sources of financial predictions, how to identify predictions, some past predictions and how they’ve stacked up against actual outcomes, the dangers of building portfolios based on predictions, and more!

Be sure to join us for our next episode where we’ll be continuing the series on investment obstacles. Thank you for listening!

Key Topics:

  • Why the financial media leverages predictions for increased viewership and business growth (2:48)
  • Current examples of predictions shared in the financial media (4:43)
  • The difficulty with differentiating between good financial journalism and noise (5:47)
  • How the financial services businesses benefit from predictions (7:16)
  • Cases of memorable “flavour of the month” investment predictions (8:42)
  • Why a recent prediction which recommended playing the VIX is dangerous for investors (9:52)
  • Investment predictions from the book, Boom, Bust & Echo (11:59)
  • Assessing the financial impact if you had invested according to the predictions of Boom, Bust & Echo (13:39)
  • How investment predictions can derail long-term financial plans (15:15)
  • Why following predictions often results in anxiety, rather than assurance (18:12)
  • The exercise we did in 2014 to assess the accuracy of expert predictions (19:14)
  • What the research shows about the performance of tactical asset strategies versus their benchmark (21:55)
  • Looking back at some of the big names and predictions during the economic crisis and recovery during 2007-2012 (25:19)
  • Why people are drawn to predictions despite their inconsistencies (30:44)
  • How the Dunning–Kruger effect causes expert predictions to persist (32:13)
  • Why you should view predictions as noise (35:53)
  • How your investment philosophy protects you from falling prey to predictions (36:19)
  • And much more!

Meet your hosts

Keith Matthews

Keith Matthews

Partner & Portfolio Manager

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Ruben Antoine

Ruben Antoine

Portfolio Manager

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Marcelo Taboada

Marcelo Taboada

Associate Portfolio Manager

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Thanks for Listening!

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